What happens to my money if my bank goes bust

Published on: Thu Aug 03 2023

In our increasingly interconnected global economy, consumers have grown used to the idea of storing their money in banks, a practice deemed to be safer than keeping cash under the mattress. However, the question often arises: "What happens to my money if my bank goes bust?" To shed light on this important topic, this blog will discuss the potential scenarios and the safeguards in place to protect consumers.

Bank Failures and Depositor Protection

Despite the rarity, bank failures do occur, brought on by a variety of reasons, including economic downturns, poor decision-making, or even fraudulent activities. When a bank becomes insolvent or bust, it means it's incapable of paying off its debts. This event could potentially jeopardize the savings of the bank's customers.

However, it's important to understand that multiple measures have been implemented worldwide to protect depositors. The most prominent among them is deposit insurance.

Deposit Insurance: Your First Line of Defense

Deposit insurance schemes have been implemented in many countries to protect depositors from the adverse effects of a bank failure. In the United States, the Federal Deposit Insurance Corporation (FDIC) insures individual depositor accounts up to $250,000, a standard set in 2010. In the UK, the Financial Services Compensation Scheme (FSCS) covers up to £85,000 per individual, per financial institution.

In the event of a bank failure, the deposit insurance corporation usually ensures that customers regain access to insured funds within a few days, either by arranging a transfer of the insured amount to another bank or by issuing a check.

What Happens to Amounts Above the Insurance Limit?

But what about the funds exceeding the deposit insurance limit? The fate of these funds often hinges on the proceedings of the bank's liquidation process. After paying off the insured deposits, the liquidators would pay the remaining funds to 'uninsured depositors,' in accordance with the hierarchy of creditors set by the law.

This distribution is not guaranteed and depends on the availability of funds after paying off other creditors. As such, it's prudent to distribute your savings across different banks if they exceed the insured limit.

The Role of Central Banks and Regulators

Central banks and financial regulatory authorities worldwide play a significant role in safeguarding the financial system. They monitor financial institutions for signs of trouble, impose capital and liquidity requirements, and enforce corrective measures when necessary to prevent banks from failing.

In situations where a bank's failure could threaten the entire financial system, central banks can decide to bail out the failing bank. This happened during the 2007-2008 financial crisis when numerous banks were deemed "too big to fail."

Are All Accounts Covered by Deposit Insurance?

It's important to note that not all accounts are covered by deposit insurance. While checking and savings accounts, money market deposit accounts, and certificates of deposit are usually covered, others like mutual funds, annuities, life insurance policies, stocks, and bonds are not. Therefore, understanding the nuances of your investments and accounts is crucial.

Bankruptcy Protection for Investment Accounts

In the US, the Securities Investor Protection Corporation (SIPC) protects customers if their brokerage firm fails, ensuring the return of missing stocks or other securities. However, it does not protect against losses arising from market fluctuations.

What Can You Do to Protect Your Money?

To safeguard your money, it's recommended to spread your savings across several banks, staying within the insured limits. Stay informed about the financial health of your bank and understand the nature of your accounts and investments. If your funds exceed the insured amount, consider getting professional advice to manage and safeguard your wealth.

In conclusion, while the possibility of a bank going bust can be a concerning thought, a robust network of regulatory safeguards is in place to protect consumers. By being informed and vigilant, you can ensure that your funds remain safe, regardless of what happens in the banking landscape.

This blog is not financial advice but an effort to educate consumers about possible scenarios in the event of a bank failure. For personalized advice, please consult with a financial advisor.

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